When investors deal with an exceptional event, they often say, ”This time, it’s different.”  It is more likely to happen during the formation of bubbles. For example, in 2021, investors and commentators said we were in a bubble for growth stocks and SPACs. While some said it was similar to the Dotcom crash of 2000, other investors said we're certainly not in a bubble. We were, and it started to crash from mid-2021.

Expectations during the formation of bubbles

Didier Sornette, a former professor of Entrepreneurial Risks at the Swiss Federal Institute of Technology, published a book,  Why Stock Markets Crash, and found that half to two-thirds of all bubbles crashed. Stock market events repeat themselves. When fiscal policy is easy, and credit comes cheap, asset prices rise. The trend inevitably reverses at some point.

Stock market bubbles

The “hot hand” fallacy is a cognitive bias that assumes a person who experiences a successful outcome has a greater chance of success if they continue.  When you invest during a bull market, you may feel like a winner on every investment or trade. But hot streaks never last. It is unsustainable if you want to build long-term wealth.

The “Hot hand” fallacy: When you can’t lose

Extrapolation is estimating the values of a variable based on known data. Scientists can look at the existing birthrate and use that data to extrapolate the future population. However, it's not a reliable method when dealing with finance and the economy.For example:<ul><li>If today is bad, you assume the future will worsen. </li><li>If today is good, you assume the future will be even better.</li></ul>Nothing lasts forever, not the bad or the good times.

The “Over-extrapolation” fallacy: The future is not the same

Long-term investing is about ensuring you can keep investing. It's not about the right stocks, taking risks, buying low or selling high. Smart investors stay in the game regardless of the conditions. They recognize patterns in the market and their own thinking, which is an important characteristic of sound investing.

The aware investor avoids losing all their money

"This time it’s different.” That's one of the investing fallacies that makes investors lose money. Here are two others to avoid.

Stashed ideas

”This Time it’s Different” and 2 Other Investing Fallacies

A stock market crash refers to a drastic, often unforeseen, drop in the stock market over a single or several days. The sudden drop in stock prices may be influenced by economic conditions, catastrophic events, or speculative elements.

Understanding market crashes

<ul><li>The Great Depression Crash of October 1929. Speculations in commodities such as autos and homes caused share prices to skyrocket, driving up prices in a panic buying mode, but many went into bankruptcy when the market bubble popped.</li><li>The Black Monday Crash of October 1987 is attributed to computer trading, derivative securities, over-evaluation, illiquidity, and trade and budget deficit.</li><li>Technology stocks triggered the Dot-com Crash of 2000-2001.</li><li>The Stock Market Crash of 2007/08  was triggered by the collapse of mortgage-backed securities in the housing sector.</li><li>The COVID Crash of March 2020.</li></ul>

Famous stock market crashes in the US

Circuit Breaker: Level 1 and 2 market-wide circuit breakers suspend trading for 15-minutes and a level 3 halts trading for the rest of the day. This can happen when the S&P 500 falls more than 7% at any time before 3:45 p.m. EST. Plunge protection: Turbulent markets can also be dampened by the purchase of huge quantities of stocks by large entities when prices drop. Big entities hold prices up to prevent individual traders from panic trading.

How to prevent a stock market crash

A stock market crash refers to a drastic, often unforeseen, drop in the prices of stocks in the stock market. The sudden drop in stock prices

Stock Market Crash

“Compound interest is the 8th wonder of the world”.

finance : to pay interest on both an amount of money and the interest it has already earned.

What Is Compounding?

Compound interest = total amount of principal and interest in future (or future value) less principal amount at present (or present value)= P [(1 + i)n – 1]Where:P = principali = nominal annual interest rate in percentage termsn = number of compounding periods

Formula For Compound interest 

<ul><li>Compound interest can significantly boost investment returns over the long term. </li><li>While a $100,000 deposit that receives 5% simple annual interest would earn $50,000 in total interest over 10 years, the annual compound interest of 5% on $10,000 would amount to $62,889.46 over the same period. </li><li>If the compounding period were instead paid monthly over the same 10-year period at 5% compound interest, the total interest would instead grow to $64,700.95.</li></ul>

How Compound Interest Grows Over Time

Series of ideas on power or compounding in Personal Finance

Power of Compounding

A diversified portfolio ensures that your capital is spread across a variety of investments. It ensures that you are not reliant on a single investment or industry for all your rewards. Fortunately, there are multiple asset classes to invest your money into, such as equity or bonds. It reduces your exposure to market risk and smooths out the peaks and valleys of investment trips. As a result, diversification is the guidewire that stops your investment portfolio from going off the rails especially when there’s a downturn in the market.

Diversification 

If you have the funds and the know-how, you can create a well-diversified portfolio by investing in specific stocks and bonds. However, you must beware of concentrating on a single investment. For instance, avoid holding shares in one industry or even a specific company as this increases your risk of financial loss.You can ensure that your positions are diversified by not allowing a single stock to account for more than 10% of your overall stock portfolio. Your goal, timescale, and risk tolerance will define your stock-to-bond-to-cash ratio.

1. Diversify with Individual Stocks and Bonds

Investing in securities that replicate multiple indices is an excellent approach to diversify your portfolio over time. An index fund will hold all the securities in each index to closely replicate the performance of that benchmark. By incorporating specific fixed-income solutions into your portfolio, you can further mitigate fixed-income volatility and unpredictability.

2. Customize with Index Funds

Using ETFs and mutual funds are simple ways to choose asset classes that help diversify your portfolio.Begin your mutual fund by investing in a few companies that you trust, and even use daily. Other alternatives include commodities, and real estate investment trusts (REITs).The key to ensuring that your portfolio is adequately diversified is to look at what’s inside each fund and its weightings. So, don’t confine yourself to your home base; extending your risk will allow you to gain greater rewards.

3. Invest in a Mix of Mutual Funds and Exchange-Traded Funds 

Asset allocation funds are the simplest approach to diversify your portfolio. These are mutual funds that have a fixed stock and bond combination. A 60/40 fund, for example, will allocate 60% of its assets to stocks and 40% to bonds or cash. As a result, a portfolio whose asset allocation mix gets more conservative as the target date approaches.For a fund that alters its risk term profile over time, target-date funds could be a good instrument. You will have to choose the duration, while the fund managers will do the diversifying, future adjustments, and rebalancing for you.

5. Asset Allocation or Target Date Funds

It is one thing to have a large portfolio and another thing to have a well-diversified portfolio. To be well-diversified, you must have a wide range of investments such as stocks, bonds, real estate funds, international securities, and so on. By so doing, you are spreading out your investment risks and making room for more returns. However, do not overdiversify, ensure you are able to monitor all your assets within your portfolio and only invest in assets that you understand.

Conclusion

Every investor’s principal goal is to reduce all possible investment risks while simultaneously increasing investment opportunities. Learn all about diversification and untold secrets. This will help anyone start their investment journey. 

Every investor’s principal goal is to reduce all possible investment risks while simultaneously increasing investment opportunities. When I started my investment journey, my primary goal was to find…

Investing Tips

One Investing Strategy You Need to Know or Risk Losing Money

Success comes when you do what you love. Warren Buffet lives by this rule and urges us all to live by it too. When you do what you love and are passionate about it, he says, you’ll never work a day in your life.

1. Do work that you love.

Warren Buffett prides himself in making swift, well-informed decisions and acting on them just as fast. He deems any unnecessary dilly-dallying as “thumb sucking.” Do your research thoroughly, well in advance. Gather all the necessary information and act decisively. Say “No” if you have to.

2. Don’t “thumb suck.”

Even when you are dealing with friends and relatives, have all the specifics of the deal spelt out beforehand, including your monetary benefits. Your bargaining leverage is always greatest before you begin a job—that’s when you have something to offer that the other party wants.

3. Spell out the specifics of a deal beforehand.

Think about the worst and best possible scenarios and promptly make the most rational, progressive decision. Assessing risks carefully helps you see where you are struggling and can guide you to make smarter decisions.

4. Assess the risk involved.

Warren Buffett is well-known for being frugal and encouraging others to do so. He’s lived in the same house he bought when he was 28 for a mere $31,500 to date. Being frugal and conservative with your spending helps you avoid waste. And when you avoid waste, you make your money work for you and save enough to invest for the future.“If you buy things you do not need, soon you will have to sell things you need.”

5. Exercise vigilance over every expense and spending.

Warren Buffet has never borrowed excessively, even when he was starting out in business. He says, “Nothing sedates rationality like large doses of effortless money.” He has always negotiated with creditors to pay what he can, and when he is debt-free, saved his money to invest. Living on handouts, loans and credit cards will not make you rich.

6. Limit your borrowing and what you owe others.

Look broadly for investment opportunities and reinvest like you have a single lifetime “punch card” with only 20 punches—make each one count. Even a small investment can generate great wealth if you are diligent enough to favor substance over form.“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because, sooner or later, one will.”

7. Reinvest your profits.

Don’t base your decisions, successes or even happiness on what others say or do. Buffet notes: “You don’t have to swing at everything—you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!'” Instead of following the crowd, measure yourself by your “Inner Scorecard”—your own standards and not the world’s.

8. Judge yourself by your own standards.

Warren Buffett says, “Time is the friend of the wonderful business, the enemy of the mediocre.” The long and rocky road to success holds many valuable lessons and makes victory that much sweeter. So, be patient and keep pressing on. Don’t obsess over quick results and instant gratification. Remember:“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”

9. Be consistent and patient.

To quit is not to give up. Warren Buffet makes mistakes just like any one of us, but he learns from them. He recalls: “I bought a company in the mid-’90s called Dexter Shoe and paid $400 million (Worth over $400 billion in 2021) for it. And it went to zero.” He is, however, quick to add: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” Know when to walk away from a loss.“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

10. Know when to quit.

Warren Buffett, worth about $72 Billion, is one of the most successful, wealthiest businessmen of all time. His lessons for business success are invaluable.

”This Time it’s Different” and 2 Other Investing Fallacies

Stock Market Crash

Power of Compounding

One Investing Strategy You Need to Know or Risk Losing Money

10 Powerful Lessons Everyone can Learn from Warren Buffett for Business Success

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